How to Establish a Foundation
Decide on a purpose for your foundation., Consider the foundation’s staffing needs., Calculate the size of the initial endowment., Look for a financial planner., Figure out how the Foundation will sustain itself., Choose the foundation’s legal...
Step-by-Step Guide
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Step 1: Decide on a purpose for your foundation.
A private foundation is an entity formed for charitable purposes.
Generally, a foundation donates money to other nonprofits instead of running its own charitable enterprise.
Determining the purpose for your foundation is the first and most important step because the activities a foundation engages in determine the necessary scope of the foundation.For example, the Bill and Melinda Gates Foundation might donate money for a specific purpose, like literacy, but they do not actually teach people to read.
They give the money to other organizations already involved in literacy education.
The Red Cross, on the other hand, actually engages in disaster relief efforts and medical education.
To illustrate how the purpose of a foundation affects its staffing and funding needs, consider a foundation formed to fund a community athletic center versus a foundation formed to fund AIDS research.
The former will obviously require a smaller endowment and staff, and may need to invest more conservatively than the latter. -
Step 2: Consider the foundation’s staffing needs.
Once you’ve determined the purpose of the foundation, you can get some idea of how many full and/or part time employees you’ll need to run it on a day to day basis.
For example, a large foundation like the Coca-Cola Foundation has many employees and contractors, including those who give financial and legal advice, others who review grants, and administrative staff.
A more modest foundation, like the community athletic center foundation in the previous example, could conceivably get by with no full time staff other than the chief benefactor.
Don’t forget to consider necessities like office equipment and office space in addition to the salaries and benefits.
A good rule of thumb is that total administrative costs should run about 15% of the organization’s budget each year. , After estimating your staffing needs, you can begin to get an idea of how much the initial endowment will need to be in order to realize the purposes you’ve laid out.
There is not an ironclad formula to determine the necessary size of a generic foundation’s endowment.
Economic conditions vary too much and the missions of various foundations are too diverse to break it down to a cookie cutter formula.
However, as a very general rule of thumb, the size of a foundation should be roughly twice its annual operating budget.A foundation must donate 5% of its total endowment annually.
Don’t forget to factor that into your calculations when thinking about the size of the endowment. , Money is important to any organization, but a foundation is money.
While it's money with a purpose, the money has to be there to achieve the purpose.
A few people might have the expertise to manage the endowment of a foundation, but most of us don't.
So using the services of a CPA or a CFP is going to be a built–in expense.
It's your job to make sure it's money well spent.
A huge CPA firm with offices all over the globe, like BDO or Marcum, will certainly have the personnel to give you sound advice.
But you might want to look locally first.
You're more likely to find someone who is going to be personally invested in your mission, which can pay dividends when you begin to recruit for the board of directors.
If no one local impresses you, contact your state association of nonprofits (or CPAs) and ask for a referral.
You can find your state association at https://www.councilofnonprofits.org/find-your-state-association.
Whoever you decide on, make sure you find a financial planner who open, honest, and is willing to educate you and (eventually) other members of the board., Since a charitable foundation must donate 5% of its total endowment annually, it is imperative that the endowment be invested in such a way as to make up for the five percent loss plus administrative costs.Of course, there are many ways to invest money, and some strategies are more appropriate for certain organizations than others.
Work with your accountant to formulate a strategy allowing the foundation to get on its feet and on sound footing financially. , Private foundations can take one of two legal structures, charitable trust or nonprofit corporation.
Both charitable trusts and nonprofit corporations have advantages and disadvantages, and the decision can be permanent, so it’s very important to carefully consider what’s right for you.
A charitable trust is the oldest form of nonprofit entity.
In some ways, trusts are more flexible than nonprofit corporations.
For example, trusts arent' required to board meetings at specific intervals, they are subject to fewer governmental registration fees, and receive more favorable tax treatment once they are in operation.
There are drawbacks to the trust as well.
For example, trustees aren't protected from personal liability like officers of a corporation are.
In addition, trusts are permanent entities.
It is impossible to change the business form or operating rules of a trust without a court order.A nonprofit corporation is the newer, and now more common method of setting up a private foundation.
Nonprofit corporations must choose board members who meet at specified times during the year, write bylaws, and generally are more expensive to start up than a charitable trust.
However, once they are set up, a nonprofit corporation can be run in any way the board sees fit.
Bylaws, operational policies, and even corporate officers can be changed by a simple majority vote of the board of directors.
Additionally, a nonprofit corporation is not a permanent entity, and offers greater protection from personal liability than does a charitable trust. -
Step 3: Calculate the size of the initial endowment.
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Step 4: Look for a financial planner.
-
Step 5: Figure out how the Foundation will sustain itself.
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Step 6: Choose the foundation’s legal structure.
Detailed Guide
A private foundation is an entity formed for charitable purposes.
Generally, a foundation donates money to other nonprofits instead of running its own charitable enterprise.
Determining the purpose for your foundation is the first and most important step because the activities a foundation engages in determine the necessary scope of the foundation.For example, the Bill and Melinda Gates Foundation might donate money for a specific purpose, like literacy, but they do not actually teach people to read.
They give the money to other organizations already involved in literacy education.
The Red Cross, on the other hand, actually engages in disaster relief efforts and medical education.
To illustrate how the purpose of a foundation affects its staffing and funding needs, consider a foundation formed to fund a community athletic center versus a foundation formed to fund AIDS research.
The former will obviously require a smaller endowment and staff, and may need to invest more conservatively than the latter.
Once you’ve determined the purpose of the foundation, you can get some idea of how many full and/or part time employees you’ll need to run it on a day to day basis.
For example, a large foundation like the Coca-Cola Foundation has many employees and contractors, including those who give financial and legal advice, others who review grants, and administrative staff.
A more modest foundation, like the community athletic center foundation in the previous example, could conceivably get by with no full time staff other than the chief benefactor.
Don’t forget to consider necessities like office equipment and office space in addition to the salaries and benefits.
A good rule of thumb is that total administrative costs should run about 15% of the organization’s budget each year. , After estimating your staffing needs, you can begin to get an idea of how much the initial endowment will need to be in order to realize the purposes you’ve laid out.
There is not an ironclad formula to determine the necessary size of a generic foundation’s endowment.
Economic conditions vary too much and the missions of various foundations are too diverse to break it down to a cookie cutter formula.
However, as a very general rule of thumb, the size of a foundation should be roughly twice its annual operating budget.A foundation must donate 5% of its total endowment annually.
Don’t forget to factor that into your calculations when thinking about the size of the endowment. , Money is important to any organization, but a foundation is money.
While it's money with a purpose, the money has to be there to achieve the purpose.
A few people might have the expertise to manage the endowment of a foundation, but most of us don't.
So using the services of a CPA or a CFP is going to be a built–in expense.
It's your job to make sure it's money well spent.
A huge CPA firm with offices all over the globe, like BDO or Marcum, will certainly have the personnel to give you sound advice.
But you might want to look locally first.
You're more likely to find someone who is going to be personally invested in your mission, which can pay dividends when you begin to recruit for the board of directors.
If no one local impresses you, contact your state association of nonprofits (or CPAs) and ask for a referral.
You can find your state association at https://www.councilofnonprofits.org/find-your-state-association.
Whoever you decide on, make sure you find a financial planner who open, honest, and is willing to educate you and (eventually) other members of the board., Since a charitable foundation must donate 5% of its total endowment annually, it is imperative that the endowment be invested in such a way as to make up for the five percent loss plus administrative costs.Of course, there are many ways to invest money, and some strategies are more appropriate for certain organizations than others.
Work with your accountant to formulate a strategy allowing the foundation to get on its feet and on sound footing financially. , Private foundations can take one of two legal structures, charitable trust or nonprofit corporation.
Both charitable trusts and nonprofit corporations have advantages and disadvantages, and the decision can be permanent, so it’s very important to carefully consider what’s right for you.
A charitable trust is the oldest form of nonprofit entity.
In some ways, trusts are more flexible than nonprofit corporations.
For example, trusts arent' required to board meetings at specific intervals, they are subject to fewer governmental registration fees, and receive more favorable tax treatment once they are in operation.
There are drawbacks to the trust as well.
For example, trustees aren't protected from personal liability like officers of a corporation are.
In addition, trusts are permanent entities.
It is impossible to change the business form or operating rules of a trust without a court order.A nonprofit corporation is the newer, and now more common method of setting up a private foundation.
Nonprofit corporations must choose board members who meet at specified times during the year, write bylaws, and generally are more expensive to start up than a charitable trust.
However, once they are set up, a nonprofit corporation can be run in any way the board sees fit.
Bylaws, operational policies, and even corporate officers can be changed by a simple majority vote of the board of directors.
Additionally, a nonprofit corporation is not a permanent entity, and offers greater protection from personal liability than does a charitable trust.
About the Author
Lisa Fisher
A passionate writer with expertise in organization topics. Loves sharing practical knowledge.
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